4.2 The industry life cycle
The comparison between the automobile industry and the PC industry makes sense only if we concentrate on similar periods in their evolution. We will concentrate here on the ‘early’ development of both industries, in what will be called the ‘introductory’ and ‘early growth’ phases in their life cycles. This is the period running from 1900 to 1930 in the automobile industry and from 1975 to 2000 in the PC industry. The automobile industry refers here to all firms producing cars and trucks, and the PC industry refers to all firms producing personal computers (i.e. laptops and desktops rather than mainframes or workstations). To make the comparison as tight as possible, only the US market of each industry is studied, that is, US and foreign firms selling in the US market. Looking at the international market would inevitably cause us to consider other factors independent of industrial dynamics, such as different countries’ business cycles and politics. We will not keep referring to US industries in what follows, but to help you to remember what we are discussing we will use the American term ‘automobile’ throughout this section rather than the British ‘car’.
We will use the ‘industry life cycle’ framework to study the two industries side by side, highlighting similarities and differences in their development over time. The industry life-cycle framework focuses on those economic mechanisms that cause firms to be born (to ‘enter’ an industry), to grow, and possibly to die (to ‘exit’ an industry). It also examines how these mechanisms affect changes in the industry structure. Industry structure refers to the characteristics of an industry, such as the number of firms operating in it, the distribution of power between them (whether some are very large and others very small, or whether they are all very large), and the degree to which new firms find it easy to enter the industry. Mechanisms affecting industry structure include the dynamics of entry and exit, technological change and falling prices. It is, therefore, on mechanisms such as these that we will focus. The industry life cycle is characterised by different phases.
A pre-market or hobbyist phase, in which the product is produced more as a hobby or luxury than for commercial purposes. This phase is characterised by much variety in the characteristics of both firms and the product versions they produce.
An introductory phase, in which the product begins to be produced more for commercial purposes than for hobby reasons. This phase is characterised by the rapid entry of many new firms which seek to take advantage of the new profit opportunities. Entry occurs principally through technological change, that is, each firm enters with a different version of the product, so this phase is the one characterised by the most product innovation.
A growth phase, in which the industry grows rapidly due to the emergence of a standardised product. A standardised product refers to the convergence of industry production around a product with a given set of characteristics (e.g. a four-wheeled car with a roof). Efficiency in the industry increases, as the standardised product can be mass produced (not possible if the product is undergoing too much change), and demand for the product rises as consumers learn more about it. Those firms not able to produce the standardised product efficiently are forced to ‘exit’ the industry (more on this below).
A mature phase, in which demand slackens and fewer technological opportunities are available. If a new product innovation is introduced in the mature phase of the industry (e.g. the replacement of LP records with CDs in the music industry) the industry life cycle may start anew as new firms enter to profit from the new technological opportunities provided by the new product. However, whether the existing leaders remain the leaders will depend on whether the new innovations build on the leaders’ existing capabilities and hence strengthen their position, or make those capabilities obsolete and hence threaten their position.
I shall now review these different phases in more detail through an analysis of the evolution of the US automobile and PC industries. We will see that there are some remarkable similarities in the early development of these two industries.